In Debt, Do You Trust?

“The Dollar is money, money is value, value is trust, trust is a contract – and the contract is debt.”

-Jim Rickards

Who do you trust? Government monetary policy makers, markets – both? Or neither?

Have you been of the view that the money that was printed was going to create a “velocity” of money or behavioral distrust? If the short-term policy was to create the illusion of growth (inflation expectations), isn’t the long-term risk a #Deflation of those expectations?

How about the $9 Trillion Dollar Problem (see Chart of The Day) that is US Dollar-denominated credit to non-bank borrowers outside of the US? That’s a massive contract. Does it have risks? As the economic cycle slows, in debt linked to inflation expectations do you trust?

Back to the Global Macro Grind…

The aforementioned quote comes from the original author of Currency Wars, Jim Rickards. I’m honored that he’ll be kicking things off at Macrocosm this afternoon in Stamford, CT alongside Jurrien Timmer, Director of Global Macro and Investment Research at Fidelity.

I think you’d guess that I don’t trust governments – certainly not on monetary policy matters. The idea that an un-elected human being whose economic forecasts are wrong 70% of the time can smooth and bend economic gravity is a little too much for me.

Not everyone at our inaugural macro conference is as bearish on the Central Planning of markets as I am, but that’s what makes a market. And I’m really looking forward to this afternoon’s Dock Debates – Macrocosm 2015.

On the heels of China’s Premier Li reminding the world that the Chinese economy has “relatively large downward pressure” overnight:

Centrally planned Chinese stocks in Shanghai fell -1.0%

The Hang Seng in Hong Kong dropped another -0.3%, taking its decline in the last month to -3.8%

Financials (XLF), which are supposed to go up on a “rate” hike, dropped to -2.3% YTD

Small Caps (Russell 2000) underperformed the SP500 (again), moving back to -4.4% YTD

Yep. Ex-Energy, Small Cap Domestic Growth, Financials, and most of US Retail (XRT -10.7% YTD), everything is fine YTD.

For those of you who have real-time quotes and an account with real-money in it, you’ll note that an -11% draw-down in the Russell 2000 (and/or US Retailers YTD) from its all-time #Bubble high in July is a problem. (hint: you need to be up +12.4%, from here, to break-even)

And it’s an even bigger credibility problem that the people who are still looking for 3-4% GDP and +8-10% “Earnings Growth” in 2015 are seeing Q3 Earnings Season wind down with the following reality:

468 of 500 S&P 500 companies have reported

Aggregate Q3 Sales Growth is down -4.3% year-over-year

Aggregate Q3 EPS Growth is down -4.6% year-over-year

I know. I know. If I back out Energy, Industrials, Retailers, etc. I still see the Financials with a -7.6% year-over-year earnings recession for Q3, so we should definitely raise rates so that Jaime Dimon can fix his NIM (net interest margin) pressure and get back to paying bonuses.

With Industrial Production Growth (IP) for October slowing to its lowest rate of change of the year at 0.3%, as the US industrial/cyclical economy enters a recession, what Dimon really needs to do is ignore that and cheer-lead some non-data-dependence @FederalReserve.

With all this politicization, it’s no wonder why Janet is having a fit about this proposed “FORM Act” (Fed Oversight Modernization Reform Act) suggesting to Congress that it would “undermine the Fed’s ability to implement policies that are in the best interest of Americans”…

On the other hand, US Presidential candidate Marco Rubio says he wants Janet Yellen out of her un-elected seat because the “Fed often times ends up making policies that dramatically alter the economy in very negative ways”…

This is still America where the Dollar is the hard-earned money of The People. The Dollar is our money, not theirs. Trust in USD policy isn’t allocated to Mr. Bernanke or Mrs. Yellen - it’s earned. Transparency and accountability is trust – and the contract is free-market liberty.

Our immediate-term Global Macro Risk Rangesare now:

UST 10yr Yield 2.17-2.30%

SPX 2016-2068

RUT 1134--1172

VIX 16.77-20.98 USD 98.20-100.13 Copper 2.07-2.18

Best of luck out there today,

KM

Keith R. McCullough Chief Executive Officer

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11/18/15 07:29 AM EST

China, Commodities and Russell 2000

Client Talking Points

CHINA

Our man Xi was being way too honest overnight admitting the Chinese economy has “relatively large downward pressure” right now – they didn’t like that in Shanghai, closing the index down -1% as EM Asia continues to trade terribly (Thailand -1.1%).

COMMODITIES

We realize our competition is still calling for “reflation” (they have been since July) and “green shoots”, but the CRB Index breaking down through lower-lows vs. the AUG low yesterday, and Copper crashing to new lows again this morning (-0.3% to $2.09) appear to be red shoots alongside the aforementioned Chinese confirmation.

RUSSELL 2000

The Russell 2000 continues to flash a bearish divergence vs the SPX, closing down -0.4% yesterday, taking it’s draw-down from the all-time #bubble high in July to -11.0%; reiterating the U.S. economic slow-down as the Russell is a purer domestic play on #GrowthSlowing.

**Tune into The Macro Show with Hedgeye CEO Keith McCullough at 9:00AM ET - CLICK HERE.

Asset Allocation

CASH

61%

US EQUITIES

4%

INTL EQUITIES

3%

COMMODITIES

0%

FIXED INCOME

28%

INTL CURRENCIES

4%

Top Long Ideas

Company

Ticker

Sector

Duration

MCD

Restaurants Sector Head Howard Penney attended MCD's investor meeting in New York City early last week. His takeaway from the meeting was that it was "very very bullish" for investors. Expectations were high, but CEO Steve Easterbrook came to NYC with big changes which have ultimately exceeded those expectations. "The big smile on Steve Easterbrook's face when talking about the current quarter was very telling," Penney writes. "He could not hide the enthusiasm." MCD increased the dollar value returned to shareholders by $10 billion. Penney and his team still see +30% upside from here.

RH

Restoration Hardware (RH) shares got caught up in the tumultuous selloff of other high-end retailers. But we're still bullish on RH. Here's why. RH Tampa has just opened. That makes 4 new Full Line Design Galleries in 90 days. And all will be open before the start of holiday shopping season and just in time to house the new product lines RH Modern and Teen. Add up the four stores and we’re looking at about 210k square feet. That alone represents about 25% growth in square footage.

When all is said and done, we still think this company has $11 in earnings power 4-years out, which is nearly double the consensus. We remain convinced that the debate should not be ‘if or when’ the stock hits $115, but rather is it going to $200 or $300? We’ll be looking at an earnings CAGR of 40-50% over five years. What kind of multiple does that deserve? 20x? 25x? 30x? We’d argue the higher end.

TLT

It was a nasty end to the week for the “growth is back” bulls. It was an equally nasty end to the week in equity markets. The S&P 500 was “going to all-time highs” Tuesday before retreating over 3% from Wednesday to Friday.

With continued data-driven confirmation that growth is slowing:

PPI (producer price index) printed -1.6% Y/Y for October

On a m/m basis, PPI declined -0.4%

Declines in the energy component certainly bring the index lower, but PPI ex. Food and energy only printed +0.1% Y/Y which is ugly

Three for the Road

TWEET OF THE DAY

QUOTE OF THE DAY

You're happiest while you're making the greatest contribution.

Robert F. Kennedy

STAT OF THE DAY

Builder Confidence slipped -3 points in November, dropping for the 1st time in 6-months and retreating off the cycle high of 65 (revised +1 point) recorded in September. Across the sub-indices, Current Sales and 6M Expectations declined -3 points and -5 points, respectively, while Current Traffic rose +1 point sequentially.

11/18/15 07:22 AM EST

The Macro Show Replay | November 18, 2015

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11/18/15 07:16 AM EST

November 18, 2015

Bullish Trend

Bearish Trend

Neutral

INDEX

BUY TRADE

SELL TRADE

PREV. CLOSE

UST10Y10-Year U.S. Treasury Yield

2.30

2.17

2.25

SPXS&P 500

2,016

2,068

2,050

RUTRussell 2000

1,134

1,172

1,153

COMPQNASDAQ Composite

4,907

4,991

4,986

NIKKNikkei 225 Index

19,015

19,933

19,630

DAXGerman DAX Composite

10,663

11,002

10,971

VIXVolatility Index

16.77

20.98

18.84

DXYU.S. Dollar Index

98.20

100.13

99.70

EURUSDEuro

1.05

1.07

1.06

USDJPYJapanese Yen

121.83

123.92

123.42

WTICLight Crude Oil Spot Price

39.75

42.96

41.12

NATGASNatural Gas Spot Price

2.23

2.42

2.37

GOLDGold Spot Price

1,065

1,088

1,069

COPPERCopper Spot Price

2.07

2.18

2.09

AAPLApple Inc.

110

116

113

PCLNPriceline.com Inc.

1,195

1,306

1,258

VRXValeant Pharmaceuticals International, Inc.

68.01

78.91

70.32

FB Facebook, Inc.

102

110

105

ATHNAthenahealth Inc.

150

163

153

BABAAlibaba Group Holding Ltd.

73.82

80.41

78.13

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11/17/15 03:45 PM EST

Cartoon of the Day: Loves Me... Loves Me Not

"... Remember that if/when the Fed pivots back to dovish from pretend-hawkish, they have to tell the American People why they are doing that," wrote Hedgeye CEO Keith McCullough in today's Early Look. "Say it with me now – Super #LateCycle Growth Slowing…"

Supply/Demand Headwinds: The market for buying defaulted receivables is especially unfavorable. Demand for paper has exceeded supply for a few years now, mirroring the environment last seen from 2005-2007 when shares of PRAA tumbled ~70%.

Growing Debt: Leverage at the company has risen quickly in the wake of the Activ deal.

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